The LIBOR Scandal

A surprising unity of right and left seems to be forming around the news that American regulators were fully informed of fraudulent LIBOR rates as early as 2007, and chose to do nothing to protect American borrowers, states or localities. The cost to the American people is unknowable; the additional instability brought on by added mistrust of the banking system, and suspicion that the "regulators" are complicit in ongoing fraud and thievery, could produce additional unknowable costs.

The usual response from the left on this kind of issue is for greater regulation, but here the regulation has demonstrably done nothing to fix the problem. It's not that they weren't aware, it's that they knew and gave a pass to their buddies.

The guy who was the head of the NY Fed at that time, by the way, is now our Secretary of the Treasury, one Timothy Geithner: the same Timothy Geithner who became Secretary of the Treasury even though he had massive unpaid taxes; indeed, the same Timothy Geithner who was allowed to pay back the money without penalties by the IRS (try that if you own a small business like, say, the Dawsonville Pool Room). In other words, when he was caught, he was extended the same kind of look-the-other-way courtesy that he extended to the London bankers.

In both cases, the loser was the American people. Who were the winners? What can we say about them, and what ought we to do about them?

I'll be happy to share more in the way of details if/when the world economy craters and our I'd like to give the word your Coke society goes medieval and TSHTF.

Short of that, throwing the criminals and their accomplices in a 6'x8' room of concrete and steel, complete with three hots and a cot, for a couple of decades sounds just about right to my sense of proportion.

Well, punishing the guilty is a good start: but the rewards are so tremendous (and the damage is to so many), it's hard to say what kind of a punishment is proportionate.

At the minimum, I would think you'd want to say that the punishment should be sufficient to deter others. But, again, the rewards are so great...

Another problem that bothers me is that I don't know how to set up a separation of powers here. Maybe the rewards for the regulator who catches a criminal manipulation needs to be on par with the kind of rewards you could enjoy from setting up a successful manipulation of a major index in international finance. At least then you'd have a fox to hen relationship, rather than a kind of professional courtesy among foxes.

I think we'll see class-action suits of astonishing size. I'd like to think they'd demand damages big enough to drive the offending banks out of business, but that will require electing people who don't believe in TBTF.

What's the mechanism for such a suit, by (say) American states and localities and individual investors, against British banks? Can you sue in a US court and expect it to be able to enforce the damages against a set of British banks? Or must you get the British courts to allow you to sue there?

I suspect you can sue in a US court and should the plaintiff(s) win, they could expect the UK banks to <insert the sound of tree frogs and crickets here>...

And Grim, you're right about proportion.

It appears my sense of proportion is as dated as my sense of justice. Using the sentence imposed on a small time crook as a guide, I change my previous suggestion of a couple of decades to twenty or so millennium. Which ought to be just about the amount of time our descendent's will need to pay off the public debt.

Where you can sue people is called the complicated law of jurisdiction. In broad terms it usually has to do with where the wrongdoing took place and where the offending party has assets, though statutes and treaties and contractual undertakings may enter into it as well. Non-Brit investors may have to sue in Great Britain, but the beauty of a class-action suit is that someone figures out where to file it so it will stick and then invites everyone to join. Although the class-action lawyers eat a giant chunk of the recovery, the zillions of individual investors don't have to work for the result or even try to understand it.